Defence Spending increase: is it real?

In the Spending Round speech on the 4^th of this month, the new Chancellor announced a boost to spending on the Armed forces. The £2.2bn increase is intended in part to ensure that the UK exceeds its commitment to increase the defence spending by half-a-percent each year in real terms (that is to say, an increase of 1/200^th per year). A Government statement says that the £2.2bn will in fact lead to a 2.6% annual increase from 2019/20 to 2020/21, which would help to keep the defence budget above 2% of GDP – the NATO target agreed at the Wales Conference.

The failure of many nations to meet the 2% figure has been used by the US to bash much of the rest of Europe when it comes to defence commitments in general. Some, such as Germany, are well below at 1.4% and probably deserve a good talking-to as their armed forces are in a pretty terrible state. But the US has even had a go at the UK, saying some of our defence figures have been manipulated to drag us over the 2% bar - just. That said, it is perhaps not that unreasonable of the US to take this view, given that they shoulder about 70% of the cost of NATO.

Trying to get hard facts about any nation’s defence spending is generally not that easy. Even getting a £sterling figure for our own defence budget is not as simple as you might think as most statistics present a dollar-figure to allow direct comparison with other NATO countries. However, NATO itself is more helpful in this respect and has published what it believes to be “facts” based upon local currencies to minimise scope for errors – though with certain reservations as we shall see.

NATO’s “Defence Expenditure of NATO Countries (2012-2019)”released on June 25^th 2019, provides a list of: “Payments by a national government actually made, or to be made, during the course of the fiscal year to meet the needs of its armed forces, those of Allies or of the Alliance” ………but………. “In view of differences between {various} sources and national GDP forecasts, and also the definition of NATO defence expenditure and national definitions, the figures shown in this report may diverge considerably from those which are quoted by media, published by  national  authorities,  or  given  in  national  budgets.”

And so, although published in June this year, even NATO has had to use estimates for Fiscal Years 2018 and 2019.  In addition, try to define the term “Fiscal Year”, as the UK, Germany and the US all have slightly different dates for their “years”. So how do you apportion spending in a specific year to tally with a NATO annual defence spending figure?   

In the UK, each ministry is provided with a Departmental Expenditure Limit (DEL). The MOD’s stated current DEL (2019/20) is £38.8bn, which some observers say will now rise to 40bn, while the MOD’s published DEL for 2020/21 is currently £41.3bn. Which, when expressed as a percentage of our projected GDP for 2020, is 1.93%.

Right away, the figures start to look odd. If the current spend is 38.8bn, then where does the 2.2bn take it? A simple addition indicates the new figure should be 41bn and not the 40bn mentioned above. But of course you cannot spend all that money in a heartbeat, so some of it will be run over till the following year. But do we have an idea of how that split will work? The answer is no, not at the moment.

NATO clearly has a rather different take on the UK’s defence-spending. Their most up-to-date figures for the UK indicate that, in current pricing terms, we spent £43.2bn in 2017, £45.3bn in 2018, and are due to spend £46.5bn this year. These are quite a bit higher than UK Government figures for those ears – making it a bit of a mystery as to how they got them. Even if the figures are adjusted downwards to reflect 2015 prices in order to create a sense of unity across all national spending figures, then NATO believes we spent 42.6bn in 2018, and will spend 42.9bn this year. Again, much higher figures than the MOD’s own stated budgets.

NATO then calculates defence spending as a proportion of GDP. On the basis of the rather higher figures it uses for the UK than we do ourselves, we still only just make it over the 2% mark, at 2.14 and 2.13% for 2018 and 2019 respectively. However, at this point, attempts to steer a rational course though all of these calculations starts to run into more trouble.

NATO has taken “Real GDP” as being in billions of US-dollars, based on 2105 prices and exchange rates. In 2015, the pound-dollar rate was 1.5 – or thereabouts; today it is 1.25 or lower. It is clear, therefore, that even NATO’s figure has to be suspect.

In fact, with a lower value for the pound against the dollar, NATO’s recorded GDP for the UK will be lower than the $3,081bn used to calculate the percentage of GDP spent on defence. It will, therefore, push up our defence spending expressed as a proportion of our GDP. So you have to wonder why we bother to talk about the figure other than in very general terms – but that goes for so much other government spending of course.

On top of all the above, there are some who claim that the announcement on the 4^th included “old money”, a trick that minsters of all political persuasion use to try to boost their reputations with the voters. For example, how much of the 1.2bn earmarked for “prioritising key capabilities such as cyber, shipbuilding and the nuclear deterrent” was already budgeted for? In fact, how much of it was due to be spent in any case as part of the trident submarine programme’s continuing milestone- or stage-payments? (Is this what was intended for the £300m also referred to in the speech?) And does allocating “£700 million to address the increased cost of employer pension contributions” actually constitute a real increase in defence spending as such?

Will the amounts mentioned actually make much difference? Probably not at the end of the day. Some assessments put the MOD’s equipment spend at £193bn over the next ten or so years, an amount the MOD simply cannot afford under current defence budget-projections. A gap of between £7bn and £10bn has already been identified, but we all know that defence equipment inflation will probably push that up as the years take their toll. Even the NAO has warned that the shortfall might double before the ten years are out.

The Trident sub programme alone could easily soak up the whole lot in one go, with all the 1.2bn (as well as that separate line item of £300m for priority capability programmes), being used to try to get the project back on schedule. In addition, some estimates suggest that in a post-Brexit world a weaker pound might add £2bn to the cost of buying the high-tech US-produced missile componentry. Another problem might be the cost of extending the life of the current Vanguard fleet to cover the delays in the Astute programme, estimated again at £2bn and likely to rise.

Some have said that the recent announcement has a lot to do with the new PM’s desire to keep in with Mr Trump. That might have had something to do with it, but we only have to go back to last summer when senior commentators were suggesting the UK’s armed forces needed a cash injection of some £20bn to allow them to meet the expectations of the US regarding NATO commitments in as a whole. So it is doubtful that £2.2bn is gong to cut it in that respect.

It was good that the Government’s announcement mentions the £7m for the Normandy Memorial; it is a great reminder of past sacrifices. But, to be frank, many might rather see it spent on more training ammo, or better gloves etc. Or perhaps it could be used more effectively by the newly established Office for Veterans Affairs announced in July this year with just £5m of funding.

Are we being ungrateful in all of this? As some have said, it at least demonstrates that the present Government is showing more commitment to the Armed Forces, for which we should be thankful. Hopefully the same Government will also have the ability to work out a way though our current travails to ensure the UK will not have to make savage cuts to our long-term defence spending as a result of a weakened, post-Brexit economy.